He Speaks to Me: Deflation fare thee well – Part I: In search of real returns in an unreal world - Eric Janszen

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NOTE: My brokerage account is 90% cash at this time. I do like ammo makers, but I am waiting for a summer sell off. I also like China and commodity producers, but it will take some time before I put money there.

Deflation fare thee well, we hardly knew ye – Part I: In search of real returns in an unreal world

With the S&P up 23% from March 2009 lows, gold up 23% from October 2008 lows, and oil up 42% from December 2008 lows, we bid farewell to the “deflation” that barely was. We’d make the farewell fond but it wasn’t around long enough for us to get intimate. You missed it entirely if you dozed off as the snow fell at the end of 2007 positioned as we were in Treasury bonds and gold to awake in the spring of 2009, yawning and sniffing the daffodils, crocuses, and Krugerrands.

In 1999 we adopted the term “disinflation” to describe these blink-you-missed-it inflation dips that trail behind the collapse of the latest bigger than the last macro-economy scale asset bubble. In the cycle of asset price inflations that has gone on for more than 20 years, post-bubble disinflation ends when the monetary and fiscal stimulus reaction of government kicks in, even if real economic growth does not. With each systemic bailout of a finance-based FIRE Economy more desperately enormous than the last, the concept of “real” goes beyond the usual meaning of growth adjusted for consumer price inflation to include adjustments for asset price inflation, as well.

For the current bubble cycle that started in 2001 when we piled into gold, we took then aspiring Federal Reserve Chairman Ben Bernanke at his word when he promised in his now famous speech Deflation: Making Sure "It" Doesn't Happen Here to let slip the dogs of inflation should a deflation spiral threaten our economic shores. He assured us the Fed will apply every tried and true monetary tool, and a dozen untested and experimental—nay, lunatic—methods as well, should a self-reinforcing process of debt deflation, falling asset and commodity prices menace the brazenly over-indebted U.S. economy.

Not that Bernanke will ever admit the U.S. was brazenly over-indebted. To a central banker an economy can never have too much debt, only not enough nominal cash flows to pay it off. In retrospect Bernanke’s 2002 speech reads like a public job interview aimed at members our financial oligarchy who were in the market for the right man to take the FIRE Economy’s monetary policy driver’s seat after their boy Greenspan left the post in 2006—and the nation’s financial system on the precipice of collapse.

Bernanke gushed, “I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.”